Why I like Lending Club

Lending Club(LC) is a peer to peer lending provider. Basically, people need money, other people have money spare, and LC brokers the transaction between them for a small fee from both parties. If it was just a transaction between 2 people, the lender would be in for a big loss if the person is not able to pay it back, but what lending club allows you to do is lend a small amount to many different people. This allows you to mitigate the risk of a single person defaulting on a loan while still earning a good rate of return. Right now the banner on the website advertises a 12.43% rate of return. That's a spectacular rate of return if it could be maintained, but there are a few not so obvious caveats in that number which I'll get to later.

Some things to consider when you want to invest:
    (1) You will not have access to all of your money for 3 years (the standard loan term). Your money is repayed in 36 chunks, maybe sooner if borrower wants to pay it off more quickly.
    (2) It pays interest just like a house mortgage( ie less money in each payment is interest earned, more is principle repayment). To maintain high returns you have to reinvest your payments received, just like dividends in the stock market.
    (3) You could lose 100% of the money you invest. Thats why you are getting higher returns than an insured investment like a CD or T-bill. Even so, the likely hood of every loan you invest in defaulting is quite low. The trick is to figure out how many loans you can support going bust before a CD looks like a good investment.

So what do I like about them?

For starters this is how banks make money! The money you deposit in the bank gets loaned out again to some sub-prime wanna be homeowner at potentially ridiculous interest rates, while your savings account earns a measly 3% if you're lucky. With LC you can cut out the middle man and go straight for the profits *see risk statements above* The loan rates go from 8-18% and risk varies accordingly. This realization  is what  convinced me to  invest with LC.  There is profit in the loan industry or else banks wouldn't be in business.   

I'm helping people out. Most people seeking loans are people who got stuck with high interest credit card rates (20-30%+) and I'm helping them get a better handle on their finances by consolidating and lowering their monthly payment. Of course, not every borrower has learned how to be responsible with credit cards and some will run their cards up again, but I'm willing to give people a hand, especially if it's in my interest to do so. Some people need loans for business startups or new mattresses, and those I scrutinize a little more carefully. (the mattress is one of my loans that has gone late :-( )

It's an investment that does not correlate with stocks or bonds. Even if the stock market tanks, this investment should still turn a profit as long as there are not too many defaults. Right now I have about 100 dollars in late loans, but I've earned 170 dollars in interest. The 12% returns advertised on lendingclub's website are not the full truth, but my gut instinct tells me that the rate of return must be better than a CD or else how could banks afford to issue certificate of deposit?

That last statement is probably my biggest mistake as an investor. You should always fully understand the risks before investing in anything, be it stocks, real estate, or Peer to Peer loans. I've promised myself to actually run the numbers for a post later this week, so then I'll know the whole truth.

To finish, here is a shot of my summary page. Click to enlarge. The website is www.lendingclub.com If anybody wants to  sign up, shoot me an email  and I'll send you a referral. It gives a bonus $25 dollars for you and me.